Lectures_micro / Microeconomics_presentation_Chapter_17
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chapter:
17
>> Externalities
Krugman/Wells
Economics
©2009 Worth Publishers |
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WHAT YOU WILL LEARN IN THIS CHAPTER
What externalities are and why they can lead to inefficiency in a market economy and support for government intervention
The difference between negative, positive, and network externalities
The importance of the Coase theorem, which explains how private individuals can sometimes solve externalities
Why some government policies to deal with externalities —such as emissions taxes, tradable permits, or Pigouvian subsidies—are efficient, although others, like environmental standards, are inefficient
WHAT YOU WILL LEARN IN THIS CHAPTER
How positive externalities give rise to arguments for industrial policy
Why network externalities are an important feature of high-tech industries
The Economics of Pollution
Pollution is a bad thing. Yet most pollution is a side effect of activities that provide us with good things.
Pollution is a side effect of useful activities, so the optimal quantity of pollution isn’t zero.
Then, how much pollution should a society have? What are the costs and benefits of pollution?
Costs and Benefits of Pollution
The marginal social cost of pollution is the additional cost imposed on society as a whole by an additional unit of pollution.
The marginal social benefit of pollution is the additional gain to society as a whole from an additional unit of pollution.
The socially optimal quantity of pollution is the quantity of pollution that society would choose if all the costs and benefits of pollution were fully accounted for.
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Pollution: An External Cost
An external cost is an uncompensated cost that an individual or firm imposes on others.
An external benefit is a benefit that an individual or firm confers on others without receiving compensation.
Pollution: An External Cost
Pollution is an example of an external cost, or negative externality; in contrast, some activities can give rise to external benefits, or positive externalities. External costs and benefits are known as externalities.
Left to itself, a market economy will typically generate too much pollution because polluters have no incentive to take into account the costs they impose on others.
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Private Solutions to Externalities
In an influential 1960 article, the economist Ronald Coase pointed out that, in an ideal world, the private sector could indeed deal with all externalities.
According to the Coase theorem, even in the presence of externalities an economy can always reach an efficient solution provided that the transaction costs—the costs to individuals of making a deal—are sufficiently low.
The costs of making a deal are known as transaction costs.